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85% of Warren Buffett's Portfolio Is in These 3 Sectors

By Sean Williams – Sep 20, 2021 at 6:06AM

Key Points

  • Nearly $268 billion of Berkshire Hathaway's $316.4 billion in invested assets are in three sectors.
  • Warren Buffett prefers to invest in cyclical, time-tested companies with healthy capital return programs.

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Diversification isn't necessary if you know what you're doing, according to the Oracle of Omaha.

In terms of the world's greatest investors, Warren Buffett deserves to be in a class of his own. Since taking over as CEO of conglomerate Berkshire Hathaway (BRK.A -1.22%) (BRK.B -1.32%) in 1965, he's created over $500 billion in value for his company's shareholders and overseen an annual average return of 20% for Berkshire's stock. Taking into account the year-to-date gains for Berkshire's Class A shares (BRK.A), the Oracle of Omaha has delivered aggregate share price gains of almost 3,400,000%.

Despite these enormous returns, diversification has never been high on Buffett's list. In fact, Buffett once said, "Diversification is protection against ignorance. It makes very little sense for those who know what they're doing." By the look of Berkshire Hathaway's portfolio, Buffett and his team know what they're doing.

As of Sept. 16, Berkshire's $316.4 billion portfolio was concentrated in just three sectors, which made up approximately 85% of invested assets.

Warren Buffett at his company's annual shareholder meeting.

Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.

Information technology: 43.31% of invested assets

A good chunk of Warren Buffett's portfolio -- about $137 billion -- is invested in tech stocks. But this figure is a bit misleading, as Berkshire Hathaway only owns two information technology companies: Apple (AAPL -0.54%) and Snowflake (SNOW 2.38%). Apple makes up $135 billion of this $137 billion position.

Buffett has regularly referred to Apple as Berkshire Hathaway's "third business." It's one of the most-recognized brands in the world, sports exceptional customer loyalty, and it's a regular leader in the innovation column.

Within the U.S., Apple's iPhone is the clear market share leader. The introduction of 5G-capable devices should lead to a multi-year product replacement that lifts sales and cash flow for its products segment.

However, Apple is also in the midst of a transformation that'll see it become a platform-based company. Leaning on services and subscriptions should reduce long-term revenue lumpiness associated with product cycle replacements and further expand the company's operating margin.

I'd be remiss if I didn't mention that Buffett absolutely loves Apple's robust capital return program. Berkshire is netting nearly $800 million in annual income via dividends from Apple, and regular share repurchases are providing a positive lift on Apple's earnings per share.

Meanwhile, cloud data-warehousing company Snowflake represents the first of what could be many tech stocks chosen by Buffett's investing lieutenants, Todd Combs and Ted Weschler. Since Buffett doesn't follow tech stocks all too closely, Combs and Weschler will be tasked with ensuring that Berkshire's portfolio offers some cutting-edge tech representation. With Snowflake, Berkshire is getting exposure to a leading infrastructure company whose products are layered atop the most-popular cloud services, such as S3 and Azure.

A bank manager shaking hands with two prospective clients.

Image source: Getty Images.

Financials: 29.97% of invested assets

Although it's no longer the largest sector in Buffett's portfolio, financials will always be the Oracle of Omaha's favorite place to put his company's capital to work. In total, Berkshire Hathaway owns a dozen financial stocks worth almost $94.3 billion, as of Sept. 16. This works out to 30% of Berkshire's invested assets.

The reason the Oracle of Omaha loves financial stocks has to do with the cyclicality of the sector. Buffett isn't oblivious to the fact that recessions and economic contractions are a normal part of the economic cycle. But he's also keenly aware that recessions only last for a few months or, at most, a couple of quarters. By comparison, periods of economic expansion last years, if not a decade. These long periods of growth allow banks to take advantage of loan and deposit growth.

Likewise, long periods of economic growth often lead to rising interest rates. As rates and yields rise, banks tend to reap the rewards via added net interest income. Bank of America (BAC -2.62%), the second-largest holding in Buffett's portfolio, is the most interest sensitive of the big bank stocks. Following its second-quarter operating results, Bank of America noted it would net $8 billion in extra net interest income in 12 months with a 100-basis-point parallel shift in the interest rate yield curve. Since this added income derives from outstanding loans, it would pretty much all go straight to BofA's bottom line.

Another reason Buffett is a big fan of financials is their robust capital return programs. Take U.S. Bancorp (USB -0.81%) as a perfect example. U.S. Bancorp's focus on the bread-and-butter of banking (loan and deposit growth), coupled with its digitization efforts that have pushed a large number of retail sales online, have led to consistent cash flow and a market-topping yield of 3.2%.

As long as Buffett exerts some level of control of Berkshire Hathaway's portfolio, you can count on financial stocks playing a key role.

Two people clanking their Coke bottles together while seated and chatting outside.

Image source: Coca-Cola.

Consumer staples: 11.58% of invested assets

The third-largest sector represented in Buffett's portfolio is consumer staples. The five consumer staples stocks that Berkshire Hathaway owns accounted for $36.6 billion in value as of Sept. 16, or a little less than 11.6% of invested assets. For added context, an 11.6% share of invested assets for consumer staples is a more than two-decade low for this sector in Berkshire Hathaway's portfolio.

The reason Buffett and his team have long been drawn to consumer staples is the predictability of cash flow from brand-name businesses. By definition, a consumer staple stock sells goods or services that are purchased in pretty much any economic environment. For instance, no matter how well or poorly the U.S. or global economy are performing, people need to buy food, toilet paper, detergent, toothpaste, and a number of other basic need goods and services. Companies that cater to these basic need items often produce predictable cash flow and a market-topping dividend.

A majority of Berkshire's invested assets in consumer staples lie with Coca-Cola (KO -0.17%) and Kraft Heinz (KHC 0.95%).

Coca-Cola is Berkshire Hathaway's longest-held stock, dating back 33 years. It's arguably the best-known consumer goods company on the planet, and is selling its products in all but two countries worldwide (North Korea and Cuba). Coke also controls a 20% share of the cold beverage market in developed countries and a 10% share in faster-growing emerging markets. It may be a relatively slow-growing company these days, but it's netting Buffett a nearly 52% annual yield, based on Berkshire's initial cost basis.

As for Kraft Heinz, it's been one of Buffett's biggest disappointments. The Oracle of Omaha has admitted that Heinz overpaid for Kraft Foods, with the combined company taking a monstrous $15 billion write-down in 2019. Yet even with this flub, Kraft Heinz is providing Buffett with a 4.4% annual yield, and its prepackaged food has been a hit during the pandemic.

The consumer staples sector isn't the growth story it once was, but it can still deliver steady income and modest returns.

Bank of America is an advertising partner of The Ascent, a Motley Fool company. Sean Williams owns shares of Bank of America. The Motley Fool owns shares of and recommends Apple, Berkshire Hathaway (B shares), and Snowflake Inc. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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